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Essay / Research Paper Abstract
This 7-page paper explains the basis of the Modern Portfolio Theory, and its weaknesses.Bibliography lists 15 sources.
Page Count:
7 pages (~225 words per page)
File: AS43_MTmarkport.rtf
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Unformatted sample text from the term paper:
areas, investors likely havent heard of him. Its interesting they havent given the reason why most investors portfolios are the way they are is due to Markowitzs Modern Portfolio Theory.
For years, analysts and investors have taught their clients to invest through use of MPT. The problem, however, is that the theory
itself has some inherent weaknesses. Furthermore, it could be classified as an obsolete theory, one that worked for the relatively simple investments in the 1960s, but is hopelessly outdated today.
MPT: WHAT IT IS When Markowitz introduced his modern portfolio theory (or MPT) in the early 1950s, the investment climate was
vastly different than it is today. Investors, at the time, were more focused on assessing risks and rewards of securities; the advice, at the time, was to invest in securities
that offered good opportunities for gain with little risk (Modern Portfolio Theory). Each security should be selected for its low-risk attributes, and from these separate pieces, a safe, low-risk portfolio
could be developed (Modern Portfolio Theory). But Markowitz believed that the single-security-at-a-time theory was a lousy way to build a portfolio.
In his 1952 article, in which he used the mathematics of diversification, he pointed out, through a variety of formulas, that investors focus on portfolios as a whole - and
measure the risk-reward characteristics based on the entire collection, rather than on single securities (Markowitz 77). He pointed out that by treating single-period returns for securities as variables, they could
be assigned expected values, standard deviations and correlations (Markowitz 80). Based on all of this information, a portfolios volatility and return could be calculated, and a better portfolio constructed (Markowitz
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